2 Auto Stocks&hellip;in High Gear?

There are plenty of auto stocks that are bargains now, but the choices and the reasons for holding auto shares are different now, says Timothy Lutts of Cabot Wealth Advisory.

In short, the stocks of all well-known automakers are unattractive. You shouldn’t buy them for the dividends. The biggest payer is Tata Motors (TTM), which pays 2.2% per year.

And you shouldn’t buy them for value. None of these companies qualifies for the Top 250 Value Stocks list of Cabot Benjamin Graham Value Letter.

But in the case of two companies, you might invest for growth!

The first is Tata Motors, whose stock has been weak in the recent difficult market, but may have turned the corner. The company has seen revenues grow every year of the past decade, and analysts are looking for record revenues and earnings in 2012.

Tata’s after-tax profit margin is a healthy 5.9%. Additionally, the company’s Indian labor force is cost-competitive, and Tata’s ability to sell into that market as the middle class grows is tops.

Finally, Tata has a broad product line, ranging from the tiny Nano—the world’s cheapest production car—to luxury cars made by Jaguar and Land Rover, which Tata bought from cash-strapped Ford in 2008. So the stock is worth keeping an eye on.

The second, and most exciting company, is Tesla (TSLA), which came public in June 2010 at $17, and is now trading near $34, just 6% off its all-time high.

If you’re into cars, you probably know more about Tesla’s electric cars than I can tell you here, but if you’re not, you should pay attention. I’ll give you the main points right up front.

While Toyota has blanketed the US with milquetoast hybrid Priuses, following the standard old automakers’ game plan, and the Chevy Volt and Nissan Leaf are uninspiring "appliances," Tesla has done something different. It has built cars that are thrilling to drive. And from its headquarters in Silicon Valley, it’s been acting like a high-tech company!

And why not, considering that co-founder and current CEO Elon Musk made his fortune by selling PayPal to eBay for $1.5 billion?!

While there are five official co-founders of Tesla, Musk looms large in the story because he used much of his own money to bankroll the project, supplemented in time by money from private investors—as well as $465 million from the US Department of Energy. Last year’s IPO was just the latest chapter of financing, and possibly the last.

From the beginning, the goal of the company has been to create and sell affordable mass-market vehicles that would have a material impact on oil consumption. But Tesla hasn’t yet targeted the mass market!

Its first step was to build and sell two-seat electric sports cars costing $109,000. It’s sold more than 2,000 of these Roadsters (in 30 countries) and will stop after 2,500.

The revenues from that effort are driving work on the company’s next car, the Model S, a sedan that sells for $57,400. Tesla has already taken reservations for more than 6,000, and will begin deliveries next year. It also expects to offer an SUV (Model X) based on the same platform, and begin deliveries of those in 2014.

And the profits from those cars will fund development of a mass-market car, priced around $30,000, that will compete with the likes of the Toyota Camry, Honda Accord, and Ford Taurus. This strategy mimics the way successful Silicon Valley companies launch products—hit the rich early adopters first, then drive costs down to serve the mass market.

Furthermore, Tesla has boosted its cash flow by inking major deals with Daimler and Toyota for its proprietary powertrain systems…which tells me these components are the best!

The company’s revenues were $15 million in 2008, $112 million in 2009, and $117 million in 2010. Next year could bring in $550 million, as the Model S hits the streets. And Musk promises a profit in 2013.

In conclusion, Tesla looks like one of the stars of the evolving automotive revolution.

While recent history has left the roadside littered with old names (Mercury, Plymouth, Pontiac, and Saturn are dead, and Saab is comatose), Tesla is a fast-growing young company with minimal debt burdens and no retirees with costly pensions!